SCOTUS Will Hear Arbitration Case in October Term

Just as I was beginning to worry that arbitration had fallen out of favor at the nation’s highest court… today the Supreme Court announced that it will hear the case of DIRECTV, Inc. v. Imburgia during its October Term,an appeal from a California Court of Appeals. In DIRECTV, a case pitting Kirkland & Ellis against the aptly named Consumer Watchdog (and other firms), the Court will consider whether parties’ choice of state law to govern enforceability of an arbitration clause can be interpreted as trumping the FAA (and precluding a preemption analysis).

The case started in 2008 as a putative class action asserting false advertising and violation of California statutes based on DIRECTV’s allegedly improper charge of early termination fees. In May of 2011, just after Concepcion was decided, and after a class had been certified on at least one theory, the defendant moved to stay the action and compel individual arbitration. (Before that, it decided such a motion would be futile under California precedent.) The district court denied the motion and the appellate court confirmed that result.

The key provisions from the agreement are these:

“Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

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“The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.”

The California Court of Appeals used California contract law to interpret the phrase “if . . . the law of your state would find this agreement . . . unenforceable” as meaning ““the law of your state without considering the preemptive effect, if any, of the FAA.” Therefore, it held that because the “class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.” The opinion acknowledged, but disregarded, Ninth Circuit precedent interpreting the same provision and reaching the opposite result.

The question that was presented to SCOTUS for consideration is this:

Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

I expect that this decision will clear up some of the confusion that exists about what kind of contract language is required to choose operation of state arbitration law, as opposed to merely which state’s law will govern interpretation of the arbitration agreement, and whether it is ever possible to completely contract around the FAA.

In other SCOTUS news, the Court denied cert in the Opalinski case, that presented the issue of whether the availability of class arbitration is a gateway issue of arbitrability that courts should presumptively decide. (I heard about that denial from SCOTUS guru @lylden himself at a dinner in Saint Paul! It’s like hearing who will be kicked off SYTYCD directly from Cat Deeley …)

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com